« Feed Overload Syndrome: 5 Reccomended Ways To Cure It | Main | Internet Stock Update: October 2005 »
11/03/2005
Virtual Stock Portfolio Update: October 2005
October was a good month for the virtual stock portfolio. The
portfolio was up 8.7% compared to
the
NASDAQ's 1.5% loss thanks to some rebalancing I did last month as well
as some paticularly good picks on the short side. My short picks were
up 9.0% and my longs we off just 0.3%. I started the month about 18%
net short on an beta adjusted basis, so the strong short performance is
somewhat to be expected, but I was happy that my longs generally held
up as well.
Year to date the portfolio is up 28.1% vs. a decline of 1.1% for the NASDAQ, which is a little bit better's than last year's 24.4% gain by the end of October. I am not going to make any changes this month as most of the picks still have some decent room to improve, but I will probably have to do a bunch of changes next month.
Long Picks
Company: Microstrategy Ticker: MSTR
Sub-sector: Business Intelligence
Investment Thesis:
I like the BI space in general and have been keeping my eye on
Microstrategy. This has recently been one of the cheaper stocks in the
space, yet it also has one of the better product portfolios and
market positions. Businesses are still spending big
bucks on BI and MSTR should be a big beneficiary.
Performance: Since 3/31/05: +31.3%, Oct. vs. Sep.: 1.3%
Comments:
Dodged a bullet this month on MSTR when they missed their Q3 numbers
but not by enough to shake long term confidence dramatically. While
the stock got hit on the miss, there is so much of the float short that
covering rapidly drove the stock price back up after the miss and
allowed me to eek out a small gain. I need to do some deep drilling to
see if this will stay in the portfolio much past this month.
Company: FireOne Group Ticker: FPA.L
Sub-sector: Financial Services
Investment Thesis:
FireOne operates an Internet payment service very similar to Neteller.
It is used primarily by on-line gamblers to transfer money around. I I
added FireOne to the portfolio because I wanted to maintain overweight
exposure to the these kind of Internet payments plays without putting
all my eggs in one basket (Neteller). Now that I have closed out
Neteller this will be sole exposure to Internet payments. I am holding
on to FPA because it trades at a discount to Neteller.
Performance: Since 7/31/05: -8.7%, Oct. vs Sep.: -8.7%
Comments:
Worst performer of the month thanks to the continued implosion of
valuations in the online gambling space. Did not do as poorly as some
others, but still not great. I will hold this month as I expect
valuations to recover a bit as people realize that gambling is not
going away.
Company: Actuate Ticker: ACTU
Sub-sector: Business Intelligence
Investment Thesis:
Acutate is a business intelligence company with a particular focus on
enterprise reporting. I had a long postion in ACTU in 2004 and lost
money on it, but I think the stock is back on the upswing now thanks to
an improved product line and focus. ACTU trades at a healthy discount
to rest of the BI group (kind of like SPSS did at one point) and every
penny of upside in its EPS could really move the stock.
Performance: Since 9/30/05: +13.8% Oct. vs. Sep.: +13.8%
Comments:
Very good performance in a tough market for long picks thanks primarily
to a nice upward surprise on Q3 earnings. Q4 numbers look very makable
as well. This stock is easily headed above $3/share.
Company: OpenText Ticker: OTEX
Sub-sector: Content Management
Investment Thesis: OpenText is a content management company that
went on an acquisition binge in 2003 and 2004. The stock suffered from
all the M&A related charges and fallout but managment now claims
that they are going to resolutely focus on EPS growth. OTEX trades at
a healthy discount to the rest of the content management group and has
a broad product portfolio. Integration snafus could trip them up, but
the low multiple on the stock should limit any potential damage.
Performance: Since 9/30/05: -2.0 Oct. vs. Sep.: -2.0%
Comments: Not a great first month in the portfolio, but given
its strong September the stock was likely to take a breather. I still
like this stock over the next few months.
Company: Cryptologic Ticker: CRYP
Sub-sector: Gaming Software
Investment Thesis: Cryptologic is a provider of gambling
software to online casinos and poker rooms. They license their
software to numerous companies in return for a cut of the take. About
70% of their revenues are from casino related software sales and about
30% from poker related sales. Since they are a technology provider and
not an operator they actually are listed in the US and do not appear to
be in danger of violating any online gambling laws.
Performance: Since 9/30/05: -4.4% Oct. vs. Sep.: -4.4%
Comments: Caught up in the turmoil affecting the online poker
stocks even though 70% of its revenues are casino related. I like the
stock even more at these valuations. I have no idea why people are
now trading the online gambling stocks at 30-40% discounts to the
mature casino companies despite the fact that the online stocks have
about 2X the margins and 4X the growth. Reason should ultimately
prevail here.
Pair Trades
Long: Party Gaming Ticker: PRTY.L
Short: SportingBet Ticker: SBT.L
Sub-sector: Online Gambling
Investment Thesis: Party gaming is the largest online gambling
company in the world with an exclusive focus on poker. Party went
public this summer at 100p and got up to 140p before getting creamed
when it talked down its revenue growth prospects on its 1st earnings
call. The stock is now below its IPO issue price and at this level it
is not only at 12X earnings, but 12.4X cashflow (of $500M/year) for a
cash flow yield of over 8%. In comparison to Party, SportingBet is trading at
a substantial premium (21X vs. 12X) even though much of the excitement
surrounding SBT has to do with its acquisition of Paradise Poker (the
#5 poker room). It will be tough for SBT to sustain the premium to
Party given Party's superior margins, cash flow and growth rates. With
the paired trade the legal risk facing the sector is minimized because
both would likely suffer equally from any legal action. Up until now
these kinds of trades didn't make sense because all the names traded
pretty much in line with each other, but with Party's somewhat
unwarranted implosion this is a perfect opportunity to put on such a
trade.
Performance: Since 9/30/05: +3.0% Oct. vs. Sep.: +3.0%
Comments: This trade started out disasterously in the beginning
of the month, but cooler heads prevailed and the inevitable multiple
compression looks like it is now underway. After seeing Party's Q3
update, I have no idea how SBT can sustain a premium PE.
Short Picks
Company: Wave Systems Ticker: WAVX
Sub-sector: Security
Investment Thesis:
I first encountered Wave when I wrote my initial analyst report on Wall
Street in the mid-1990s. Wave has remained in business largely by
claiming that it is developing revolutionary security technologies,
kind of like a bio-tech company that never gets out of trials. With a
grand total of $1.4M in revenues over the last 3.5 years, a $4M/quarter
cash burn rate and only $4M or so in the bank, a day of reckoning is
fast approaching.
Performance: Since 10/1/04: +5.5% Oct. vs. Sep.: 7.5%
Comments:
The stock got yet another delisting notice at the end of the month and
with cash running out (yet again) in the next month or so, shareholders
will undoubtedly be looking at yet another highly dilutive PIPE
transaction. It took a 24% discount to market on non-restricted fully
registered shares to get the last PIPE done and yet the stock is
trading almost 10% below that issue price less than 3 months after that
deal. It will be interesting to see what kind of terms they have to
offer to get this one done. The funny thing is, I could get wacked on
this short if revenues for Q2 are more than a couple hundred K above
last quarter's even though the company will still be losing millions as
the hard core retail investors holding this stock inexplicably don't
seem to be focused on the bottom line. It's amazing to me that the
board hasn't fired the obviously inept management team yet, but until
they do that's good news for my short.
Company: Citadel Security Software Ticker: CDSS
Sub-sector: Security
Investment Thesis:
Citadel offers a subscription service to help companies spot security
vulnerabilities. It's a good idea, but a lot of other companies
including a number of private companies offer the same service. Lately
Citadel's business has been falling off a cliff. They are buring cash
to the tune of $5M/quarter and yet the management team hasn't done any
major cost cutting. As a VC, I can tell you first hand that it is
incredibly difficult to turn around this kind of situation even if you
get some product momentum. I haven't seen a single company in this
kind of shape pull it out.
Performance: Since 9/30/05: 28.3% Oct. vs. Sep.: 28.3%
Comments:
Better late than never I guess. The stock traded off strongly in
October as the remaining retail investors realized that the company was
approaching "the wall" at 100mph. The company postponed judgement day
by doing a financing with a former board member which essentially paid
off the bank debt (which was in default) and provided enough cash to
make another payroll cycle. This company needs to close a major
(highly dilutive) financing or be sold by the end of the month.
Company: Emerge Interactive Ticker: EMRG
Sub-sector: Vertical Applications
Investment Thesis:
Do you need software to help trade and manage cattle? Apparently not
many other people do either, otherwise EMRG wouldn't have generated
only $335K in revenues last quarter. With cash finally running out
after $205M in losses this company should be headed for the
slaughterhouse shortly.
Performance: Since 9/30/05: 30.8% Sep. vs. Aug.: 30.8%
Comments:
Stock traded down sharply on no real news which seems to indicate that
there are no buyers left. I feel like it would be greedy to hold this
stock another month, but I don't see any reason why things will get
better.
Company: Entrust Ticker: ENTU
Sub-sector: Security
Investment Thesis: Entrust started out providing Certificate
Authority software for use in public key encryption and now has a
broader line of identify management products. I know them from my days
covering the security sector on Wall Street. They seem to disappoint
at least once a year and given that the stock has now fully recovered
from their last dissapointment they should be due again. It doesn't
help that most of the major software players, including IBM, Oracle and
CA, have made their own identity management acquisitions in the past 18
months either.
Performance: Since 9/30/05: +20.5% Oct. vs. Sep.: +20.5%
Comments: A good first month in the portfolio. Hit their
quarter but guided down leading to a sell-off. Seems as though
investors are realizing that growth won't be particularly easy now that
they face competition from the big boys.
November 3, 2005 in Internet, Software, Stocks | Permalink
Legal Disclaimer
The thoughts and opinions on this blog are mine and mine alone and not affiliated in any way with Inductive Capital LP, San Andreas Capital LLC, or any other company I am involved with. Nothing written in this blog should be considered investment, tax, legal,financial or any other kind of advice. These writings, misinformed as they may be, are just my personal opinions.
Comments